Monday, May 11, 2020
Court of Appeal:
Bank Not Liable to One Depositor Cheated by Another
Panel Says Financial Institution Has No Duty to Monitor Accounts on Look-Out for Suspicious Activity
By a MetNews Staff Writer
—Long Beach Police Department
A bank has no duty to monitor the accounts of its depositors to detect possible fraud, Div. Three of the Fourth District Court of Appeal held Friday, rejecting the bid of a company to place blame on Bank of America for his having been cheated out of more than $700,000 by a freelance bookkeeper.
The scam artist who took plaintiff Kurtz-Ahlers’s money was Elizabeth “Lizzie” Mulder, who embezzled more than $1.5 million from the various women-owned small businesses that were clients of her Orange County financial services company. She was sentenced on Oct. 16, 2017 to five years and three months in federal prison.
Over a five-year period, Mulder instructed Kurtz-Ahlers (a luxury travel agency now known as “”Hidden Doorways, A KAA Travel Collection”) to make out its quarterly checks in payment of state and federal income taxes to “Income Tax Payments,” and to give her the checks for mailing. Rather than sending them to the U.S. Internal Revenue Service and the state Franchise Tax Board, she deposited them in her own account at the same Bank of America branch where Kurtz-Ahlers also had its account.
Her account included the fictitious business name of “Income Tax Payments.”
Plaintiff’s Contention Rejected
That name, Kurtz-Ahlers argued on appeal from Orange Superior Court Judge Walter P. Schwarm’s nonsuit judgment in favor of the bank, should have alerted the financial institution to Mulder’s fraudulent activity.
Justice Richard M. Aronson authored the opinion affirming the judgment.
“[T]he trial court correctly ruled as a matter of law the Bank had no duty to monitor Mulder’s account,” he wrote. “That conclusion renders moot the dispute over whether Mulder’s dba ‘Income Tax Payments’ was a highly suspicious ‘red flag’ triggering an inquiry into possible fraud.”
Supreme Court Decision
Kurtz-Ahlers argued that a duty to investigate was established by the California Supreme Court in its 1978 opinion in Sun ’n Sand, Inc. v. United California Bank. In that case, an action was reinstated against United California Bank (“UCB”) on three theories, including negligence.
Over a period of three years, an employee of the plaintiff prepared a total off nine checks in small amounts made out to UCB, obtained on each the signature of a corporate officer who assumed the sum was owed the bank, altered the amount to an appreciably higher one, presented the checks to UCB, and had the funds deposited in her personal account.
Justice Stanley Mosk wrote for the majority in declaring:
“Our conclusion that UCB should have appreciated the indicia of misappropriation is, of course, nothing other than a determination that Sun ’Sand’s loss was reasonably foreseeable. We are not persuaded that commerce will be so impeded by a duty of inquiry in this context that we should depart from the fundamental principle that actors are liable for reasonably foreseeable losses occasioned by their conduct. The duty is narrowly circumscribed: it is activated only when checks, not insignificant in amount, are drawn payable to the order of a bank and are presented to the payee bank by a third party seeking to negotiate the checks for his own benefit.”
“Moreover, the bank’s obligation is minimal. We hold simply that the bank may not ignore the danger signals inherent in such an attempted negotiation. There must be objective indicia from which the bank could reasonably conclude that the party presenting the check is authorized to transact in the manner proposed. In the absence of such indicia the bank pays at its peril.”
Case Is Inapposite
That holding, Aronson said, does not benefit Kurtz-Ahlers.
“Significantly,” he remarked, he high court set sharp limits on the reach of this new duty of inquiry.”
The jurist wrote:
“Here, the ‘objective indicia’ test was met because the checks were made payable to the very account in which they were deposited, ‘Income Tax Payments,’ and an authorized signatory endorsed each check. Consequently, the ‘narrowly circumscribed’ duty to inquire recognized in Surf ’n Sand does not apply here.”
Kurtz-Ahlers urged that if a duty to monitor accounts does not already exist, the court should create one, at least in the context of protecting one depositor at a branch from the scam of another depositor there.
That, Aronson responded, “would imperil both customer privacy and the expedited processing of banking transactions so crucial to a modern economy,” adding:
“For its part, Kurtz-Ahlers asserts an intra-bank duty of inquiry would impose a “minor burden” on banks easily outweighed by the resulting benefit of protecting depositors from misappropriation by fraudsters like Mulder. But the argument overlooks the fact depositors are often, if not always, in a better position than their banks to protect themselves from fraud by simple steps such as using due diligence in hiring bookkeepers and by occasionally checking their financial records. In Kurtz-Ahlers’s case it would not have been too difficult to discover five years’ worth of diverted tax payments, had Kurtz-Ahlers exercised basic prudence. In other words, Kurtz-Ahlers makes no compelling argument why the Bank should have borne the burden of detecting Mulder’s fraudulent scheme rather than Kurtz-Ahlers itself.”
The case is Kurtz-Ahlers, LLC v. Bank of America N.A., 2020 S.O.S. 2287.
Background on Mulder
Mulder pled guilty to wire fraud and filing a false tax return. Aronson’s opinion notes that she “is currently in federal prison.”
At the time of her sentencing, U.S. District Court Judge David O. Carter of the Central District of California order Mulder to make restitution to seven victims, including Kurtz-Ahlers, in the total amount of $1,538,781. Additionally, Kurtz-Ahlers on June 25, 2019 obtained a judgment against Mulder on Orange Superior Court in the amount of $3,188,857.83.
The U.S. Attorney’s Office said in a statement issued on the day of sentencing”
“Mulder, who was personal friends with most of the victims, used a variety of means to defraud the victims, including creating false personas and fraudulent bank accounts. Using fictitious email accounts, Mulder posed as a potential buyer for one business, obtained a power-of-attorney over that business’ accounts and emptied the business’ accounts claiming the funds were being used for expenses associated with the sale of the company. In reality, Mulder had used the business’ money for her own personal expenses….
“Mulder used the money obtained from her fraudulent scheme for a variety of personal expenses, including a rental home in Laguna Beach, cosmetic surgery, vacations and an Arabian horse.”
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